Our ground checks reveal that commercial banks are stopping their promotional mortgage rates. However, as they are aiming for double-digit mortgage growth rates next year, we expect them to re-introduce packages at lower rates as well – since the rates do not yet reflect the latest cut made by BI in Oct. Note that the combination of the relaxation of LTV thresholds and lower mortgage rates following the BI rate cut during 3Q16 resulted in a shifting of consumer preferences back to obtaining financing for properties via a mortgage.
¨ Promo on hold, but... we learnt that some banks are stopping their promotional mortgage packages this month. The current normal mortgage rate has a fixed interest rate of 9.5-10.25% for one year. Bank Central Asia (BCA) ($BBCA) is still offering the lowest mortgage rate with its latest Fix & Cap promotion, ie 7.99% pa fixed interest for the first three years and capped for a further three years at 8.99% pa. This is almost 50bps lower than what was offered in its previous Fix & Cap promotion. However, we believe IND Banks would continue to introduce lower mortgage rates in the future as:

i. Banks are aiming for double-digit growth in their mortgage segments in 2017. BCA and Bank CIMB Niaga ($BNGA) are aiming for 12% and 9-10% mortgage loan growth respectively;

ii. Based on research by rumah123.com, the most important factor in buying properties is the Bank Indonesia (BI) rate. Most buyers still utilise mortgage facilities to purchase properties. This is also reflected in the trend shifting back towards taking a mortgage as a payment method during 3Q16. This is due to a combination of the relaxation of the loan-to-value (LTV) thresholds and lower mortgage rates following BI’s rate cut.

As such, we expect banks to start re-introducing their respective mortgages at lower rates earliest by Jan 2017. Their current mortgage rates do not yet reflect the latest BI rate cut, which was made in October. Note, also, that presales activities in December are more moderate.

¨ Maintain OVERWEIGHT. We keep our OVERWEIGHT rating on the sector, as we expect a better outlook in 2017 as the following factors have already been priced in:

i. All the catalysts that include the tax amnesty;

ii. A potentially lower benchmark interest rate;

iii. The relaxation of the LTV threshold;

iv. The allowance for properties under construction to come under a second mortgage.

The share prices of property counters under our coverage have softened following public protests on 4 Nov that demanded incumbent Jakarta governor Basuki Tjahaja Purnama, commonly known as Ahok, be arrested for blasphemy. Share prices dropped further after the US election was concluded on 9 Nov. On average, share prices have plunged 9% YTD since 4 Nov. These numbers have recovered by 5% on average from their lowest level during the same period. Nonetheless, the sector is currently valued at a 65% discount to RNAV, or around -1.5SD from its 3-year mean of 56%, which looks compelling. (Lydia Suwandi)

BBCA states that it will be quite difficult to lower interest rates during the last few weeks of the year, the bank will review lowering interest rates again next year. As per Nov16, corporate lending rates have declined by 50bps to become 9.75% over the past year while retail lending rates have declined by 100bps to 10.5%. Meanwhile, in the consumer segment, mortgage rates have declined by 25bps to become 10% while non-mortgage lending rates have declined by 195bps to become 6.68%. (Bisnis Indonesia)

BBCA targets loan growth of 10-11% in 2017 and deposit growth of 5-8%. Meanwhile, BMRI targets loan growth of 12% next year, equivalent to this year’s target. In 2017, BMRI will focus on the following loan segments: corporate, consumer, and micro segment. Meanwhile, BMRI targets deposit growth of 8-10%. On a side note, BMRI targets its electronic money to grow by +30%yoy in 2017, based on the latest data published in Sept16, BMRI has issued 8.1mn electronic money cards, +32%yoy. (Kontan)

Loans growth has rebounded
Bank Indonesia states that banking industry loans growth in October 2016 grew by 7.5% YoY. The growth was better than September’s growth of 6.5% YoY, and October is the first month where loans growth accelerates after a string of deceleration that had happened since the start of the year. Furthermore, Bank Indonesia expects that significant loans growth recovery could start in 2Q17 as appetite for capacity expansion is expected to rebound. In line with authorities’ projection, we expect that loans to grow by 11% in 2017, helped by : 1) Higher GDP growth as we expect GDP to grow by 5.3% in 2017 versus 5.1% in 2017 2) Bank Indonesia’s stance to keep liquidity afloat by keeping lenient monetary policy 3) High level consumer confidence that we expect to continue throughout 2017 where in October 2016 the reading was at 116.8, much higher than in September of 110.0.

NPL is stabilizing
Banking industry NPL was lower to 3.1% in September 2016 from 3.2% a month earlier after accelerating consistently since January 2016. This is an encouraging sign that asset quality has begun to stabilize. With accelerating loans growth in October 2016, we expect that the NPL reading in October could be better. The improvement of asset quality is the main theme of our call for better bottom line growth for banking industry in 2017. As of September 2016, banks grew its net income by only 9.7% YoY to Rp84.8 tn. Slower growth of provision expense in 2017 due to gradual decrease of NPL would be the main factor for net income acceleration in 2017. We expect banking industry’s to book 15-17% net income growth in 2017 thanks to higher loans growth and declining NPL.

Cost of fund is starting to creep up
OJK confirms that several banks from Book I to Book IV have started to slightly increase special TD rates since October 2016. The increase of TD rate is inevitable as LDR is stubbornly above 90% and banks have begun to push loans book growth after long period of asset quality consolidation. Nevertheless, we will only see gradual increase of cost of fund and stabilization of NIM instead of significant drop of NIM as we believe Bank Indonesia will keep its commitment to lenient monetary policy to keep the acceleration of GDP growth,

What will the central bank do ?
Bank Indonesia decided to keep reverse repo rate benchmark at 4.75% (in part to guard the exchange rate stability) in response to global uncertainty after Trump won US presidential election. However, we do not believe that BI would change its course to a more hawkish stance as inflation is still contained and the need of monetary policy to complement the already limited fiscal room. Instead, we expect BI to lower reserve requirement in 1H17 to push liquidity to the market.
BBNI and BJBR are still our top pick
We maintain BBNI as our top pick for Book IV bank on the back of our conviction that the bank could significantly lower improve its asset quality in 2017. We expect BBNI’s NPL to decline to 2.5% at the end of 2017 from 3Q16 level of 3.1% on. For Book III bank, BJBR is our choice as the bank’s transformation has proven to significantly improve asset quality in 2016 that can continue throughout 2017.

The major shareholders of BBCA, Farindo Investment (Mauritius) Ltd, has transferred their ownership to PT Dwimuria
Investama Andalan last Friday. Both entities, which are owned by the Hartono family (Djarum Group), controls 47.15% stake in
the largest private bank in Indonesia. The transfer is part of the repatriation of offshore wealth under the tax amnesty
program.

- Loan growth:
1) +6.5% y-y (+3.8% ytd; +1.6% m-m) in September compared to +6.8% y-y (+2.2% ytd; +0.4% m-m) in August.
2) Adjusted for rupiah appreciation, total loan growth was +8.4% y-y, compared to +7.7% y-y in August. Rupiah loans were +10.5% y-y (+10.7% y-y in August) while FX loans in USD term is at -1.7% y-y vs. -6.9% y-y in August.
3) Based on bank classification, strongest loan growth came from BUKU IV banks at +13.5% y-y, followed by BUKU II banks at +3.9% y-y and BUKU III banks at +2.9%y-y. Meanwhile, BUKU I banks recorded a decline in loan growth at -45.1% y-y as a number of banks have been upgraded from BUKU I to BUKU II.
4) In terms of usage, investment loans still has the highest growth rate of 9.1% y-y, down from 9.4% y-y in August, followed by consumption at 8.0% y-y from 8.2%y-y in August and working capital loans at 4.2% y-y vs. 4.7% y-y in August.
5) Of the large sectors with >5% loan exposure: agriculture (6.5% exposure) +14.7% y-y vs. +15.7% y-y in August, manufacturing (17.7% exposure) at -0.1% y-y vs. +2.9% y-y, wholesale and trade (19.7%) at +7.1% y-y vs. +6.1% y-y, and home ownership (8.1% exposure) at +7.2% y-y, up from 6.8% in August.
6) Regionally, all areas showed declining y-y loan growth except Sumatera at +6.1% y-y in September from +5.5%y-y in August.

- Deposit growth:
1) +3.1% y-y (+4.3% ytd; -0.1% m-m).
2) Adjusted for the currency movement, deposit grew +5.2% y-y in September vs. +6.4%y-y in August. Rupiah deposits grew +7.1% y-y vs. +9.9% in August and foreign currency deposits contracted by 14.5% y-y. In USD terms, FX deposits contracted by 3.6% y-y.
3) Based on bank classification deposits in BUKU IV banks +8.0% y-y, BUKU III +3.8% y-y while in BUKU II -5.6%y-y and BUKU I -48.4%y-y.
4) Based on type, CASA deposits was +5.0% y-y vs. +8.8% y-y in August (CA at -2.7% y-y and savings at +11.5% y-y) while time deposits growth remains weak at +1.1% y-y. - Liquidity: the weak deposit growth increased the industry LDR to 91.5% in September from 89.9% in August. Increase in LDR was seen across all bank classifications, with the highest increase coming from BUKU II banks to 92.5% in September (from 89.0% in August) and BUKU III banks to 97.6% in September (from 94.3% in August).

- Asset quality:
1) NPL declined to 3.10% in September from 3.22% in August while special mention loans (category 2) also declined to
5.44% in September from 5.52% in August. In terms of absolute amount, total NPL increased 21.9% y-y (+29.5% ytd; -2.1% m-m).
2) Improvement in NPL was seen across all banks, with exception of BUKU I banks in which NPL increased to 2.02% in September from 1.98% in August.
3) In terms of segment, NPL in investment loans improved to 3.46% from 3.53% in August, in consumer loans to 1.71% from 1.79% and in working capital to 3.73% from 3.91%.
4) Industry with >4% NPL level: mining at 6.38% (7.22% in August), construction at 4.26% (4.92% in August), wholesale & retail at 4.42%( 4.33%), and transportation at 4.77% (5.61%). Meanwhile, NPL in manufacturing sector declined to 3.88% from 3.92% in August, in household to 1.80% from 1.88%, in apartment 2.32% from 2.44% and in shop houses to 4.16% from 4.18%.
5) Location wise, all areas saw improvement in loan quality with the highest improvement was seen in Sumatera to 3.18% from 3.38% in August and Kalimantan to 4.92% from 5.07%.

- Profitability:
1) Industry NIM improved to 5.65% from 5.59% in August thanks to continuing reduction in time deposits rates.
2) NIM in state banks increased to 6.40% from 6.24% while NIM of forex commercial banks remains stable at 5.31%.
3) NIM in BUKU IV banks increased to 6.59% (from 6.46% in August) while BUKU III NIM remained relatively stable.

- Capital: average CAR declined to 22.6% in September from 23.3% in August. Decline in CAR was seen across all bank classifications with the highest decline coming from BUKU IV banks to 20.7% (from 21.8% in August).

- Banks' average profit growth improved to 4% y-y in 9M16 from +1% y-y in 6M16, but loan and deposit growth remained weak at +9% y-y and +6% y-y respectively. NIM improved to 6.7% while NPL reached 3.0% with signs of peak. Trading at 1.6x P/BV 2017, we keep our Neutral sector call with $BBRI, $BBTN and $BNGA as top picks.

- Average net profit growth of 4% y-y in 9M16. The 12 banks under our result universe show improving profit growth from the previous quarter given the high losses incurred by $BNLI in 1Q and 2Q16. The results were in line with expectations, accounting 73% of the consensus’ full year targets. $BMRI, $BBTN, and $BJBR posted below expectations, while $PNBN, $BJTM and $BNGA above. $BNLI continued to record losses in 9M16 on its rising NPL level. At the PPOP level, average growth was a decent 18% y-y as banks had a better management on operating costs.

- Loan growth slowed down to 9% y-y. The industry indicates +6.4% y-y loan growth in September while some of the banks in our universe managed to record much higher loan growth; BBNI (+21% y-y) is on corporate/infrastructure loans, BBRI (+16% y-y) on corporate and micro loans, while $BBTN (+17% y-y) on housing loans. Over the past one year, more loans have been channeled into corporate (especially state companies) and micro segments, at the expense of SME commercial and consumer loan segments. Of the 12 banks, three ($BDMN, $BNGA and $BNLI) still posted negative y-y growth.

- Deposit growth also weakened to 6% y-y. Total deposit still grew at +8% y-y in June, while the 5% economic growth is not enough to generate better deposit growth. Five banks ($BDMN, $BJBR, $BJTM, $BNGA and $BNLI) still recorded negative y-y deposit growth with two of them ($BDMN and $BNLI) continued to see negative ytd growth. CASA deposits continued to gain more than time deposits, which see declining rates.

- NIM still improved to 6.7% in 9M16. In contrast to our earlier expectation, banks recorded better margin in 3Q16 as they had not lower the lending rates as much as deposits rates. While this is true in the declining rate environment, banks are also pending further reduction in view of rising need for provisioning. Average NIM reached 6.9% in 3Q16 from 6.7% in 2Q16, but this level is expected to decline in the coming quarter on pressure to reach single digit lending rates.

- NPL reaching the new peak of 3.0%. Additional problem loans are growing at a slower pace, with some banks claiming to have seen peak NPL in August. Banks like $BMRI and $BBCA still expect peak NPL in 4Q16 and continued charging high provisioning.

- Classified loans at 11.3%. Average classified loans (NPL, SML, and performing restructured loans) were at 11.2% in June and 10.9% in March 2016. This shows less pressure on asset quality while coverage/classified loans ratio improved to average 32% from 28% a year ago.

- Operating costs were well managed. The average cost/income ratio went down to 45% in 3Q16 from 48% in 2016 and 47% in 3Q15. Of the banks, $PNBN, $BNGA, and $BDMN showed the best cost/income ratio improvement.

- Maintain Neutral. We will wait for stronger support for improving NPL and hence keep our Neutral call for the stock, which trades at 1.6x P/BV 2017. Our top picks are $BBRI, $BBTN and $BNGA.

YTD BBCA has seen a declining trend in its CoF due to its strong CASA base. We lower out CoF by 35bps accordingly and this has lifted our FY17F EPS by 4% which implies a growth of 15% YoY. We also raise BBCA’s valuation back to its 10-year average of 3.3x PBV (vs. 3.2x previously) which increases our TP by 10% to IDR17,000. We believe higher multiple is justified on improving loan quality and higher NPL coverage formation in FY17. Maintain BUY.

- The revenue increased Rp0.9tn on the date with asset repatriation up Rp37tn to Rp325tn. About Rp3tn of the revenue goes to BCA. Upon this low realization, Bank Indonesia has recently more than halved its forecast for tax amnesty revenue, from Rp53.4tn to Rp21tn. Repatriation fund, according to the central bank, would only amount to Rp180tn or 18% of what the government targets. Bisnis Indonesia reported that Vice President Jusuf Kalla gave signal that the government might revise down targets after seeing end Sep16 result. Separately, Koran Tempo wrote a comment by the Director General of Taxation Ken Dwijugiasteadi who said that redemption fee is no longer the focus. Instead, efforts will be directed to attract repatriation which, as of yesterday, was recorded at Rp15.7tn (Ministry of Finance, Bisnis Indonesia, Koran Tempo)

- +9% gains in MSCI Indonesia since our country upgrade in July - Since our upgrade of Indonesian equities to overweight two months ago in the MIG publication after clarity on its tax amnesty programme emerged, sentiment has further improved following the appointment of well respected Finance Minister Sri Mulyani Indrawati. The Indonesian equity market has seen strong equity inflows in 3Q16 lifting the index up ~9% (local currency terms, +8.2% in USD), which has outpaced world equities’ gains (+5.2%) for the same period and supported our call.

- Year to date’s gains of +18.6% has also more than recouped 2015’s losses of -12%, which has supported the turnaround highlighted in our January 2016’s South East Asia Equity Strategy report. The equity market rally year to date has been supported by a benign environment of lower interest rates, stable IDR currency vs the USD, under-owned positions in global portfolios and improving confidence in Indonesia’s recovery story. Estimated equity inflows into Indonesia so far for 3Q has exceeded the total inflows for 1H16, driving the market to new highs. Since mid May this year, it is estimated that net equity inflows reached $1.7bln, vs $1.6bln net outflows over the whole of 2015 (source: JPM estimates).

- Near term positives post amnesty and cabinet reshuffle look priced in, valuations are now close to 10 year high – At 16x PER, Indonesian equities is now trading close to +2 standard deviations to its 10 year historical average multiple and at its highest valuation level since 2007, which we believe has priced in much of the near term positives. Although near term liquidity is likely to remain supportive given benign expectations on interest rates, we caution that valuations have caught up and believe it is prudent to start taking some money off the table. On domestic updates, while the recently released 2017 budget is credible, it is unlikely to lead to further corporate earnings upgrades given a moderate government spending target of 6% (planned fiscal deficit for 2017 is 2.4% of GDP, flat/lower than 2016E). Towards the end of September and December which marks the first and second phases of the tax amnesty programme’s staggered tax rates for declared wealth, investor sentiment may also be influenced by expectations over the tax collections.

- Muted start to the 9-month tax amnesty programme, although still early days - As of 23rd August 2016, the asset declaration in the Tax Amnesty Program has reached Rp51.7tn, consisting of 85% onshore/15% offshore assets (12% overseas assets declared, 3% overseas net assets repatriated), while asset repatriation has reached Rp1.6 tn. Momentum of onshore assets declared in first half of August has picked up, with the tax office reporting about Rp11.5tn worth of onshore assets declared (>4x July’s). About three-quarters of the assets declared were from private individuals, and the balance private entities, which we view as supportive of property sector’s recovery given interest rates are expected to remain low while the Ministry of Finance has allowed repatriated funds to be invested in real assets (such as property and gold).

- Looking ahead, earnings upgrades need to pick up momentum for the rally to have more legs - Earnings wise, the recent 2Q results season was mixed with single digit corporate top line growth from a year ago. Concerns on banks remain dragged by asset quality issues while commodity related earnings have been moderate. Following the latest 2Q earnings season (where consensus earnings were trimmed -2% lower for FY16E and FY17E), FY16E and FY17E earnings are now forecast to grow +7% and +14% respectively (higher than Asia ex Japan equities’ 2.2% FY16E and 11% for FY17E respectively) which we believe is priced in current valuations.

Time to lock in some profits – Switch out of names which have rallied and offer no upside to target prices- Sectors we are cautious on are: Commodity related plays which have rallied and priced in recovery expectations (coal – Bukit Asam, ITMG, palm oil – Astra Agro, London Sumatra), Banks (loans growth will be moderate while we expect asset quality concerns to remain a near term overhang) and Utilities (in particular, Perusahaan Gas – where we think profitability will remain pressured by regulatory efforts to lower gas prices).

Preferred Picks/Switch Ideas

- Preferred Sectors we would accumulate new positions are: Property (Bumi Serpong – Western Jakarta play, large landbank catering to middle income buyers), Telecommunications (Telekomunikasi Indonesia – improving smartphone penetration and data usage supported by a young population), Consumer (Indofood and Media Nusantara, which benefit from an improving domestic economy in 2H16) and Infrastructure (Jasa Marga – No. 1 toll road operator, long term beneficiary of infrastructure development in Indonesia).

- Risks to the current rally include weaker than expected global economy, faster than expected Federal Reserve interest rate hikes which may result in global liquidity volatility and disappointments in the domestic recovery and infrastructure spending pace (continues to be a focus in the 2017 budget, with 9% yoy expected growth).

Last weekend, BBNI took us with several foreign and local investors on a site visit to Bojonegoro, which had the highest GDP growth of 13.3% in the country last year. By leveraging its close connection with the local government, BBNI is able to tap into the medium-size enterprise and corporate loan segments in the region. We maintain our BUY call and GGM-derived TP of IDR6,200 (34% upside). The stock is currently trading at 1.0x 2016F P/BV (-1SD of its historical mean).

¨ Support from local government. Bojonegoro recorded 13.3% GDP growth in 2015, thanks to its abundant oil & gas reserves. Amid lower commodity prices, the local government has set the minimum wages for villages at only IDR1m (below the minimum wages of IDR1.3m for its city) to stimulate growth in surrounding villages and to attract more local and foreign investors in the non-commodity sector. The local government has also simplified the permit application process for investors under one roof in an effort to achieve more sustainable GDP growth going forward.

¨ More players in local banking landscape. Given its high GDP growth, more banks have opened branches in Bojonegoro. Apart from state-owned enterprise (SoE) banks and regional bank (Bank Jatim), these include private banks eg Bank Tabungan Pensiunan Nasional (BTPN), Panin (PNBN) and Bank Central Asia (BBCA)). This has led to increased competition in the area. Specifically, we think that Bank Negara Indonesia (BBNI) is well-positioned due to its strong relationship with the local Government and business owners.

¨ Leveraging its relationship. During our site visit, we met up with one of BBNI’s corporate borrowers – the biggest Wallet bird nest producer in the area. The company started out managing bird nests but has now expanded to the downstream business by producing bird nest bottled beverage using recycled water and by-products of its upstream bird nests. However, we think its downstream business is still at an early stage and would only be profitable in three years’ time at the earliest due to the small market for specialised (bird nest) bottled beverage. Moreover, with the estimated ASP of IDR35,000, its product is relatively expensive in the bottled beverage market given that most Indonesians prefer tea bottled beverage. The second BBNI borrower we visited was a local batik producer, who emphasised that her business is a side job to supplement her full-time employment as a junior high school teacher. This falls under BBNI’s small business segment due its <IDR5bn loan size. On the other hand, Bank Rakyat Indonesia (BBRI) caters more towards loan sizes of <IDR100m, while Bank Mandiri (BMRI) taps more into the national-scale corporate segment.

Lending rates remain under scrutiny by governmentSince the new government took office in November 2014, there has been increased focus on lowering lending rates to help boost economic growth and improve Indonesia’s competitiveness vs. its neighbors. So far the Financial Services Authority (OJK) and Bank Indonesia have taken steps to ease borrowing conditions (see Exhibit 5). While average lending rates have begun to decline, overall lending rates/NIMs/ROAs remain higher than that of ASEAN peers.

Could it intervene further?OJK has ruled out a formal cap on lending rates, but it has asked banks to propose how “single digit” lending rates could be achieved in 2016. So far, lower lending rates are already being targeted in three ways: (1) reducing deposit costs for lenders; (2) providing a lower-cost substitute, e.g. government subsidized lending; or (3) providing incentives for greater competition. Government officials have also discussed the potential for a further cut in the subsidized micro finance lending rate and a capping of SOE deposit rates to reduce system interest rates further.

Broader systemic risks a concern given structurally high ratesA broad-based reduction of industry lending rates could result in credit rationing as banks avoid riskier segments with higher credit risks, reduce lending in remote areas, and further shrink loan books of smaller banks with higher funding/operational costs. Additionally, system liquidity risks are a concern given the already high LDR and slow deposit growth. Tax amnesty could boost to system liquidity, but falling deposit rates and policy uncertainty could dis-incentivize repatriation of offshore funds.

BDMN and BBRI most impacted; BBNI (CL-Buy) still attractiveWe cut EPS for our coverage by up to 24% and adjust our target prices to reflect further cannibalization of high-margin lending into our forecasts and a slower recovery in credit costs. We downgrade BDMN to Sell given these headwinds and its larger earnings risk from single-digit lending rate pressures. Upside risk: Faster growth in SME lending; better funding costs. While BBNI could see downside 2017/2018 ROA of 1.8%-1.9 (vs. GSe of 2.0-2.1%) under single-digit lending rates, its valuation would still be attractive with a 2016E P/BV of 1.0X. At CL-Buy, BBNI remains our top pick.

Indonesia: 12th stimulus policy – Further Streamlining in Various Permits

The government released the details of its 12th stimulus policy, which mostly aim to further simplify various permits in doing business. While the latest policy appears to be an accentuation of previous stimulus to streamlines business process, in our view the government continues to show its focus to attract more investment into domestic economy, especially given sizeable contribution from Gross Fixed Capital Formation (GFCF) to overall Indonesia’s economy.

Efforts to lure more investmentPresident Joko Widodo through several cabinet meetings has emphasized his means to increase the rating of the country’s Ease of Doing Business (EODB) to the 40th rank. The World Bank surveyed that Indonesia stood at rank 109th from a total of 189 surveyed countries. Other ASEAN countries such as Singapore and Malaysia stand at the 1st and 18th rank of the list. Currently, there are 10 indicators that measure the EODB rank for a country. The indicators are business starting process, construction permit dealing process, tax payment, credit accessibility, contract enforcement, electricity supply, across border trading, insolvency settlement, and minority investors protection. To comply with the indicators, the Indonesian Economic Ministry along with the Investment Coordinating Board formed deregulations through the 12th Economic Stimulus.

Key points of the 12th stimulus policyThe 12th stimulus introduced a new deregulation scheme that will cut 94 procedures into only 49 procedures and 9 permits to only 6 permits. Furthermore, the stimulus package is followed by the release of 16 new regulations.¨ For the business starting process, the initial regulation requires investors to go through 13 procedures that will take 47 days and IDR6.8m-7.8m to obtain Business Permit (SIUP), Company Registration (TDP), Deed of Establishment, location permit, and nuisance permit. With the deregulation, investors will only need 7-10 days procedure with IDR2.7m fee. Moreover, the government will only require 3 permits for micro, small and medium enterprises (MSME), which are SIUP, TDP, and deed of establishment.¨ The government also released a new regulation through regulation no 7/2016 on changes in authorised capital for limited company. With the new regulation, MSME’s authorised capital will be determined by mutual agreement of the founders as outlined in the deed of establishment. However, the regulation will keep enacting the minimum requirement of IDR50m for limited company.¨ As for building construction permit, the government will cut the process into 14 procedures within 52 days from initial of 17 procedures and 210 days of processing time. Moreover, the building construction permit fee will be reduced to IDR70m from the initial fee of IDR86m.¨ Tax payment process will be cut into 10x payments with online system from an initial of 54x payments. While property registration will be cut into 3 procedures in 7 days with a fee of 8.3% from the value of property. The government previously imposed 5 procedures with 25 processing days and 10.8% fee for the property registration.¨ The government also decreases the simple lawsuit settlement process to only 8 procedures in 28 days. Any disagreement on the verdict will be able to appeal with additional 3 procedures and maximum of 10 days of settlement.Follow-up measure to reduce overall execution riskBefore the release of the 12th stimulus package, the government has released a total of 195 regulations from September 2015- April 2016. The government stated that as of 18 April, it has successfully completed 169 regulations or 87% from the total regulation released. There are 16 (8%) regulations that are still in the discussion process, while the remaining 10 regulations that will be taken out from the Economic Stimulus Package. The government stated that each packages received positive responses from investors and citizens. However, the government will increase its socialisation and evaluate the implementation through dissemination and business clinics. The business clinics aimed to further discuss the stimulus packages with stakeholders to ensure the on the ground efficiency of the packages. Moreover, the business clinic will also serve as the communication facility between investors and government to resolve any problems, including the export increment issues. The clinics and dissemination will be implemented in 3 regions, such as Palembang, Balikpapan, and Lombok.

The near term catalyst is the tax amnesty approvalWe continue to believe that tax amnesty approval could serve as one of major catalyst in the near term. Post the Parliament’s recess session, the long-awaited tax amnesty bill is finally being discussed under the Commission XI, which has been holding hearing sessions with experts, business leaders and other stakeholders. Given its importance on the overall budget and the progress of infrastructure development, the Government is mulling over the fact that the bill could take effect in June. We believe the initial approval of the tax amnesty could be an important catalyst for the near term, as well as a major step taken in the right direction to finally foster the compliance of taxpayers – which could help solidify the Government’s overall budget composition going forward. As such, we expect further foreign fund inflows to support the market post the approval of the tax amnesty although we acknowledge that execution risks still remain at this juncture. Our top pick in the market are $BBCA, $BBTN, $ICBP, $INDF, $ADHI, $LPPF, $MIKA, $TLKM, $BSDE and $LSIP.

- BI will change the benchmark rate into 7-day reverse repo rate, effective 19 August 2016. While OJK has yet to decide their maximum rate, we believe there will not be any major change in rates and hence impact is neutral on banks. We maintain our Neutral rating on the sector on rising NPL and lower margin.

- New central bank benchmark rate. Bank Indonesia has just announced that they will change the reference rate from BI rate into 7-day reverse repo rate (RRR), effective 19 August 2016. This will bring down the benchmark rate closer to the overnight interbank rate of 4.8%, in line with the practice conducted by many other central banks. The 7-day RRR is currently at 5.50%, while the BI rate is at 6.75%, similar to the 12-month interbank rate.

- OJK needs to change their ceiling rates. All of the banks under BUKU 4 (main capital >Rp30tr) and BUKU 3 (main capital of Rp5-30tr) are required to set maximum rupiah time deposit rates of BI rate +75-100bps, or 7.50-7.75% pa. With the BI rate no longer available in the future, OJK needs to use the new benchmark, either the 7-day reverse repo or other rate. What we have to confirm is whether OJK will keep the same premium to set the maximum rates or change it (reduce or expand it). If they use the new reference rate and keep the same premium, banks will see their cost of funds decline substantially by 125bps. However, the central bank has been quoted saying that OJK will use the 12 month SBI (currently at 6.75%), similar to the current BI rate, as the base for the deposit rate cap, in which case there will be no change in rates.

- Implication to the banking industry. We believe the impact will be neutral to banks. While there is a chance that deposit rates will be lowered following the change of the reference rate, BI’s statement that OJK might still use the 12- month SBI rate should keep the rates in line with the movement of the benchmark rate. The LPS guaranteed deposit rate (for deposits <Rp2bn in a bank) for commercial banks is at 7.25%, while the maximum special rate set by OJK for large deposits is at 7.75%.

- Concerns over deposits shifting to bonds overstated. There has been a concern that some large deposits will be shifted into the bond market, in particular the government bonds, which provide 7.4% yield for 10-year tenor, as well as the corporate bonds with higher yield. However, the market size of the government bonds of Rp1,473tr is 82% of total rupiah time deposits and the size of the total bond market of Rp1,727tr is 96% to total rupiah time deposits. This makes little room for rupiah time deposits to switch into bonds given their similar size. What will happen in our opinion is the rising demand for bonds, increasing their value and lowering the yield towards the deposit rates. The government will still keep issuing new bonds, but this will not be enough to satisfy demand, hence depending on the OJK’s new rate cap on large deposits, we do not see significant shift in time deposits and concerns over liquidity problem is not warranted.

- Deposit structure – Based on LPS data, total banks’ third party funds were Rp4,402tr in Dec 15, of which 84% of them were rupiah deposits or Rp3,723tr. Of this amount, 49% (Rp1,812tr) were rupiah deposits with outstanding amount of >Rp2bn (11% or Rp411tr with deposits between Rp2-5bn and 38% or Rp1,402tr with deposits >Rp5bn). Hence the size of the large deposits of >Rp5bn is close to the government bond market as well.

- Expect rates to decline. We have factored in declining interest rates on both deposits and lending rates of around 75- 100bps pa in 2016-2017. Aside from the government’s pressure for banks to lower the rates, the lower inflation expectations should also support lower rates. Under the declining interest rate scenario, usually banks will see a temporary margin expansion as they lower the cost of funds a few months before lending rate adjustment. However, we expect a 20bps average margin reduction in the industry in 2016 and another 30bps in 2017, taking into account steeper reduction in lending rates, as anticipated by the authorities.

- Maintain Neutral on banking. At this juncture, we maintain our Neutral stance on the banking industry as we see risk of rising problem loans in the coming months plus lower margin. This should limit the industry's earnings growth, which we expect at 7% this year. We keep BBNI (TP Rp6,000) and BBTN (TP Rp2,100) as our sector top picks. The recent price weakness on BBRI (TP Rp12,000) makes its valuation attractive at this level however, we keep our Neutral call for now. $BBCA$BBRI$BMRI$BBNI$BBTN

Bank Indonesia estimated that the non performing loan (NPL) ratio for Indonesian banks stand at 2.7-2.8% in 1Q16. The central bank stated that the banking industry is still cautious in its credit disbursement amid the high credit risk this year. The central bank further stated that the credit demand is not as high and is still waiting for the lower benchmark rate to support its growth. Moreover, the NPL for mortgage (KPR) stood at 2.6% in 2M16 or 0.3% higher compared to 12M15. While mining sector NPL reached 4.67% or 0.55% higher than 12M15.

We re-initiate coverage on Indonesia banks with an OVERWEIGHT. Higher government spending should translate into a 5.1% GDP growth pick-up and stronger loan growth of 14.3%. We forecast for earnings to grow a stronger 8.7% as credit costs stabilise at 161bps. Our Top Picks are BBCA (strong asset quality and least vulnerable to regulatory risks) and BBTN, as it would benefit most from the Government’s subsidised mortgage scheme.

¨ Reasonable valuations on higher GDP growth. According to our economists, 2016 would be a better year, supported by higher government spending in 2M16 to IDR5.4trn (+306% YoY) and a GDP growth pick-up to 5.1%. Yet with such potential, Indonesian banks under our coverage are trading at current P/BV multiple of 2.2x 2016F P/BV vs a historical mean of 2.9x and -2SD of 2.1x. We believe the multiple de-rating reflects the slide in ROAE to 17.6% for 2016F from c.25% in 2010 as loan growth slowed and credit costs spiked.

¨ Two sides of the knife. The Financial Services Authority (OJK) has introduced changes/revised guidelines to spur banks to lend more, but its renewed lower lending rates push has unnerved investors. We believe an immediate lending rate cuts to single digits directive is unlikely, as this has a detrimental impact on earnings. We expect it to take indirect measures that provide banks room to lower lending rates. March’s 125bps cut in maximum time deposit rates was the first move in this direction. We believe state-owned enterprise (SOE) banks would be most impacted, as the OJK would expect them to take the lead.

¨ Lower margins outlook. Lower caps for time deposit (TD) rates would mitigate the policy rate cuts (75bps YTD and another 25bps expected by end-2016), resulting in a moderate 7-12bps decline in net interest margins (NIMs). We expect Bank Negara Indonesia (BBNI) and Bank Tabungan Pensiunan Nasional (BTPN) to be most affected, while Bank Rakyat Indonesia (BBRI) and Bank Tabungan Negara (BBTN) are expected to see some uptick in NIMs.

¨ Smoother assets quality ride. Stronger economic growth and lower interest rates, we believe, would ease pressure on asset quality in 2016. We expect non-performing loans (NPLs) to trend higher in 1H16 and peak in 2Q16. Among banks under our coverage, we believe Bank Mandiri (given its loan portfolio size) would need a longer time to improve asset quality. We expect sector gross NPL ratio to edge down to 2% by Dec 2016 (Dec 2015: 2.1%) with stable 161bps credit costs and improvements in loan loss coverage to 155.2% by end-2016.

¨ Wholesale funding as additional liquidity source. As the system loan-to-deposit ratio (LDR) touched 90.9% in January, banks are likely to tap the wholesale market for funding, given more affordable benchmark rates and longer maturity profiles. Negotiable certificates of deposits, bonds and medium-term notes are the preferred wholesale instruments of the three big SOE banks.

¨ Bank Central Asia (BBCA) and BBTN are our Top Picks. Given regulatory risks and asset quality concerns, BBCA is our Top Pick for big-cap banks. Its premium valuation (3.0x 2016F P/BV vs peers’ 1.8x average) is justified as its NIMs are least vulnerable to government intervention risks while assets quality is superior vis-à-vis peers. BBTN is our small-cap Top Pick as we anticipate ROAE expansion and asset quality improvements in the next two years.

BBCA: Company is considering renegotiating the terms of its insurance partnership with AIA Group Ltd. after seeing recent billion-dollar distribution deals in Asia. Company is working with an adviser to find ways to get more money out of its deal with Hong Kong-based AIA. BCA wants to ensure the terms of its agreement to distribute AIA products through its branches reflect valuations of other lenders’ recent bancassurance transactions.

- Banks have not shown significant earnings improvement in 2M16, with average net profit growth of 6% y-y, accounting for 14% of consensus expectations. Meanwhile, average NIM remained stable at 6.6% with loan growth of 11% y-y (vs. industry loans of 8%) and provisioning increased 60% y-y. Maintain Neutral.

- 6% y-y average earnings growth - banks have not shown any significant earnings improvement in the first two months of the year with average net earnings growth of 6% y-y. The results were still within expectations, accounting for 14% of average consensus’ full year forecast. Despite 16% y-y growth in operating income (net interest income plus non-interest income), banks have been increasing provisioning charges, which rose 60% y-y, as an anticipation for higher problem loans ahead. This, in addition to growing operating expenses, limited earnings growth. Among the larger banks, BBCA posted the highest earnings growth of 18% y-y, while among the smaller banks, BBTN, BJBR, and BJTM excelled with 19% y-y growth rate. Meanwhile BTPN and BDMN suffered 20% and 17% y-y earnings decline respectively due to competition in the micro lending.

- Loan and deposit growth. Due to cyclicality, most banks recorded negative or slow loan m-m growth in February, with average growth rate of 11% y-y, higher than the indicated industry loan growth of 8% y-y. Some banks reported high loan growth, such as BBNI due to government projects and BBTN on subsidized housing loans. Deposit growth was also weak, averaging 7% y-y, similar to the industry level, with CASA deposit growth overtaking time deposit growth at 12% vs. 1% yy. This is partly due to increasing government funds transferred as well as the crowding out effect on the government’s bond issuance and the regulation that requires pension funds to place some portion of their funds in government papers.

- Stable net interest margin for now – average NIM remained high at 6.6% in 2M16, up from 6.2% in 2M15 thanks to steeper reduction in cost of funds than in asset yield (60bps vs. 10bps). Banks have been cutting their time deposit rates on the back of weaker loan demand and are still taking the advantage before they start lowering the lending rates.

- Rising provisioning charges – the industry data shows the NPL level increased to 2.7% in January from 2.5% in December 2015 and we believe banks are experiencing the same pattern in February. This prompted banks to increase their provisioning charges, which rose 60% y-y. NPL is still expected to rise in the coming months, in particular from the retail commercial segment, and in terms of industry NPL comes mainly from mining related businesses. BBCA recorded the highest increase in provisioning charges at 429% y-y amid from the low base. PNBN came second with +262% y-y, while BJBR and BJTM bucked the trend with -62% and -39% y-y, as they have seen asset improvement. Provisioning level is now at 3.3% of total loans.

- Industry outlook and recommendation - We are still expecting rising problem loans in the coming months as a delayed effect from weak economic growth last year. Hence banks are still forecast to beef up their provisioning. We still rate Neutral on the sector, which is trading at 1.9x P/BV for 2016, with top picks on BBNI (TP Rp6,000) and BBTN (TP Rp2,100).

What’s New Rate cut announced. BI announced a reference rate (BI rate) cut of 25bps to 7.0%. In addition, BI also lowered the Rupiah reserve requirement by 100bps to 6.5% (effective March 2016). In line with this, deposit and lending facility rates were cut by 25bps to 5% and 7.5% respectively.

Impact and view: Short-term positive… While this is positive in the short term for the banks, as banks tend to be able to reprice deposits faster than loans, there would be some ups deposits faster than loans ide potential to NIM, particularly for banks with a deposit mix skewed towards a higher time deposit composition (eg. $BDMN, $BBTN, $BTPN). The lower rates would also be positive to multi-finance companies from a funding cost perspective.

…but we are still keeping our cautious stance on the Indonesian banks because:

1) Concerns on asset quality Concerns on asset quality Concerns on asset quality are not over yet although our base case assumes stability in 2H16

2) OJK and BI have formed an ad hoc team to push down lending rates to below 10% below 10% and the team is expected to meet this task by end 2016. Among the possible approaches to this is a new OJK regulation to cap NIM at 4% with the aim to improve efficiency and competitiveness.

Should the NIM cap regulation be implemented this will be negative to banks as this would limit to a large extent, topline growth. Even if loan growth were to be boosted to 14% as intended by BI/OJK, it would be insufficient to maintain growth momentum for the net interest income line.

There have been noises in the past to lower lending rates for loans and also to impose a cap on NIM but none of these have so far materialised.

Stock picks: As we retain our cautious stance on the sector, our top picks remain $BBCA and $BDMN. Our pick on $BBCA lies on its defensiveness and strong financial indicators especially with respect to asset quality. $BDMN remains our pick for a turnaround story. Key risk to $BDMN however would be its inability to retain its high NIM (>8%) should the NIM cap be strictly implemented. This would mean $BDMN would have to significantly ramp up its strategy to lower funding costs quicker than planned.

Should the NIM cap be implemented, it would be negative to the SOE banks SOE banks SOE banks namely, $BMRI, $BBNI and $BBRI, as we are of the view that the government may impose these punitive recommendations on them before rolling it out to the entire sector.

What’s New Rate cut announced. BI announced a reference rate (BI rate) cut of 25bps to 7.0%. In addition, BI also lowered the Rupiah reserve requirement by 100bps to 6.5% (effective March 2016). In line with this, deposit and lending facility rates were cut by 25bps to 5% and 7.5% respectively.

Impact and view: Short-term positive… While this is positive in the short term for the banks, as banks tend to be able to reprice deposits faster than loans, there would be some ups deposits faster than loans ide potential to NIM, particularly for banks with a deposit mix skewed towards a higher time deposit composition (eg. $BDMN, $BBTN, $BTPN). The lower rates would also be positive to multi-finance companies from a funding cost perspective.

…but we are still keeping our cautious stance on the Indonesian banks because:

1) Concerns on asset quality Concerns on asset quality Concerns on asset quality are not over yet although our base case assumes stability in 2H16

2) OJK and BI have formed an ad hoc team to push down lending rates to below 10% below 10% and the team is expected to meet this task by end 2016. Among the possible approaches to this is a new OJK regulation to cap NIM at 4% with the aim to improve efficiency and competitiveness.

Should the NIM cap regulation be implemented this will be negative to banks as this would limit to a large extent, topline growth. Even if loan growth were to be boosted to 14% as intended by BI/OJK, it would be insufficient to maintain growth momentum for the net interest income line.

There have been noises in the past to lower lending rates for loans and also to impose a cap on NIM but none of these have so far materialised.

Stock picks: As we retain our cautious stance on the sector, our top picks remain $BBCA and $BDMN. Our pick on $BBCA lies on its defensiveness and strong financial indicators especially with respect to asset quality. $BDMN remains our pick for a turnaround story. Key risk to $BDMN however would be its inability to retain its high NIM (>8%) should the NIM cap be strictly implemented. This would mean $BDMN would have to significantly ramp up its strategy to lower funding costs quicker than planned.

Should the NIM cap be implemented, it would be negative to the SOE banks SOE banks SOE banks namely, $BMRI, $BBNI and $BBRI, as we are of the view that the government may impose these punitive recommendations on them before rolling it out to the entire sector.

What’s New Rate cut announced. BI announced a reference rate (BI rate) cut of 25bps to 7.0%. In addition, BI also lowered the Rupiah reserve requirement by 100bps to 6.5% (effective March 2016). In line with this, deposit and lending facility rates were cut by 25bps to 5% and 7.5% respectively.

Impact and view: Short-term positive… While this is positive in the short term for the banks, as banks tend to be able to reprice deposits faster than loans, there would be some ups deposits faster than loans ide potential to NIM, particularly for banks with a deposit mix skewed towards a higher time deposit composition (eg. $BDMN, $BBTN, $BTPN). The lower rates would also be positive to multi-finance companies from a funding cost perspective.

…but we are still keeping our cautious stance on the Indonesian banks because:

1) Concerns on asset quality Concerns on asset quality Concerns on asset quality are not over yet although our base case assumes stability in 2H16

2) OJK and BI have formed an ad hoc team to push down lending rates to below 10% below 10% and the team is expected to meet this task by end 2016. Among the possible approaches to this is a new OJK regulation to cap NIM at 4% with the aim to improve efficiency and competitiveness.

Should the NIM cap regulation be implemented this will be negative to banks as this would limit to a large extent, topline growth. Even if loan growth were to be boosted to 14% as intended by BI/OJK, it would be insufficient to maintain growth momentum for the net interest income line.

There have been noises in the past to lower lending rates for loans and also to impose a cap on NIM but none of these have so far materialised.

Stock picks: As we retain our cautious stance on the sector, our top picks remain $BBCA and $BDMN. Our pick on $BBCA lies on its defensiveness and strong financial indicators especially with respect to asset quality. $BDMN remains our pick for a turnaround story. Key risk to $BDMN however would be its inability to retain its high NIM (>8%) should the NIM cap be strictly implemented. This would mean $BDMN would have to significantly ramp up its strategy to lower funding costs quicker than planned.

Should the NIM cap be implemented, it would be negative to the SOE banks SOE banks SOE banks namely, $BMRI, $BBNI and $BBRI, as we are of the view that the government may impose these punitive recommendations on them before rolling it out to the entire sector.

Indonesia’s big banks have released their unaudited FY15 financialresults. Net profits are in line with our estimates and we expect nonegative surprises in NPL that might cause coverage ratios to dropsignificantly upon the official FY15 announcement. Among the bigplayers, $BBRI remains our Top BUY for its attractive ROE.

$BBRI: Top BUY, TP at IDR13,000$BBRI booked a IDR25t net profit (+7% YoY), in line with our IDR24.7tforecast. Loans grew 13% YoY on strong expansion in the high-NIM microbusiness. We expect NIM to remain close to 8% in 2016 on higher KURvolume. $BBRI’s excellent risk control in the segment should allow thebank to keep provisioning expense to a minimum while maintaining asufficient coverage ratio.

$BBCA: BUY, TP at IDR16,000Net profit was IDR17.3t (+5% YoY), in line with our IDR18.2t forecast.Loans grew 12% YoY and the bank had previously indicated that NPLmight tick up to as high as 1% by YE15. But even at this rate, $BBCA’s NPLremains much below the industry’s average, and its rising provisionshould ensure high coverage ratio. We maintain $BBCA as one of our topBUYs in the sector for its stable earnings and asset quality.

$BMRI: HOLD, TP at IDR8,200$BMRI’s net profit stood at IDR20t (+1% YoY), in line with our IDR19.8tforecast. Nonetheless, we remain cautious on its 2016 outlookconsidering $BMRI’s bigger exposure to corporate and SME businesscompared to its peers and the fact that these segments are morevulnerable to the recent slowdown in the economy. NPL is likely tocontinue on an uptrend despite the bank’s aggressive loan restructuringstrategy in 2015.

Indonesia’s big banks have released their unaudited FY15 financialresults. Net profits are in line with our estimates and we expect nonegative surprises in NPL that might cause coverage ratios to dropsignificantly upon the official FY15 announcement. Among the bigplayers, $BBRI remains our Top BUY for its attractive ROE.

$BBRI: Top BUY, TP at IDR13,000$BBRI booked a IDR25t net profit (+7% YoY), in line with our IDR24.7tforecast. Loans grew 13% YoY on strong expansion in the high-NIM microbusiness. We expect NIM to remain close to 8% in 2016 on higher KURvolume. $BBRI’s excellent risk control in the segment should allow thebank to keep provisioning expense to a minimum while maintaining asufficient coverage ratio.

$BBCA: BUY, TP at IDR16,000Net profit was IDR17.3t (+5% YoY), in line with our IDR18.2t forecast.Loans grew 12% YoY and the bank had previously indicated that NPLmight tick up to as high as 1% by YE15. But even at this rate, $BBCA’s NPLremains much below the industry’s average, and its rising provisionshould ensure high coverage ratio. We maintain $BBCA as one of our topBUYs in the sector for its stable earnings and asset quality.

$BMRI: HOLD, TP at IDR8,200$BMRI’s net profit stood at IDR20t (+1% YoY), in line with our IDR19.8tforecast. Nonetheless, we remain cautious on its 2016 outlookconsidering $BMRI’s bigger exposure to corporate and SME businesscompared to its peers and the fact that these segments are morevulnerable to the recent slowdown in the economy. NPL is likely tocontinue on an uptrend despite the bank’s aggressive loan restructuringstrategy in 2015.

Indonesia’s big banks have released their unaudited FY15 financialresults. Net profits are in line with our estimates and we expect nonegative surprises in NPL that might cause coverage ratios to dropsignificantly upon the official FY15 announcement. Among the bigplayers, $BBRI remains our Top BUY for its attractive ROE.

$BBRI: Top BUY, TP at IDR13,000$BBRI booked a IDR25t net profit (+7% YoY), in line with our IDR24.7tforecast. Loans grew 13% YoY on strong expansion in the high-NIM microbusiness. We expect NIM to remain close to 8% in 2016 on higher KURvolume. $BBRI’s excellent risk control in the segment should allow thebank to keep provisioning expense to a minimum while maintaining asufficient coverage ratio.

$BBCA: BUY, TP at IDR16,000Net profit was IDR17.3t (+5% YoY), in line with our IDR18.2t forecast.Loans grew 12% YoY and the bank had previously indicated that NPLmight tick up to as high as 1% by YE15. But even at this rate, $BBCA’s NPLremains much below the industry’s average, and its rising provisionshould ensure high coverage ratio. We maintain $BBCA as one of our topBUYs in the sector for its stable earnings and asset quality.

$BMRI: HOLD, TP at IDR8,200$BMRI’s net profit stood at IDR20t (+1% YoY), in line with our IDR19.8tforecast. Nonetheless, we remain cautious on its 2016 outlookconsidering $BMRI’s bigger exposure to corporate and SME businesscompared to its peers and the fact that these segments are morevulnerable to the recent slowdown in the economy. NPL is likely tocontinue on an uptrend despite the bank’s aggressive loan restructuringstrategy in 2015.

ASII: Early signs of improvement
Six specific catalysts investors should heed for Astra:
1) Purchase ahead of Idul Fitri holiday (Lebaran in July)
2) Increase in government spending
3) Indo Auto Show in August, automakers say this usually contributes 5-7% to annual sales.
4) Lower financing rate. BCA targeting 20% growth in auto loans in 2015
5) Potentially 10% higher LTV. Central bank has been entertaining relaxation of LTV for autos as well as mortgages by 10%. If so, LTV for 4W may be raised to 80% from current 70%.
6) New Product cycle. New Model of Innova tentatively out in Aug 2015, and new MPV actually in 2016.
We always like to look forward but present conditions must also make sense. Some noteworthy developments:
BCA saw a +35% MoM in new bookings for auto loans in April post lowering borrowing rate in the sector (~100bps in Feb 2015) – prove that this well-run bank can still dictate a few things when they said their mind to (has one of the lowest cost of funds in the market). (Sales Desk likes BBCA)
4W market share recovering?
Could Honda’s momentum be fading?
Myth that Astra financing very dependent on auto sales….is a myth. Growth in financing has actually surpassed 4W sales and earnings from financing is now 30% vs. 4W’s 23%. That means ASII’s financing business is taking market share from competitors.
Valuation reasonable – below market and again breaking 1std band vs. historical
In short, whilst the stock may not be a screaming buy because headwinds still persist, it is one we definitely need to monitor. The potential catalysts and early signs of improvements mentioned above translate to a solid thesis to buy Astra (ASII).

Indo Strategy - Positioning amidst slowest growth in a decade
Too early to bottom fish
The market sharp sell-down may appear excessive, yet we think it may be too early to be an aggressive buyer. The outlook of subdued growth outlook, probably a bit slower, broader and longer lasting than most envisaged, suggests it is still better to seek out stocks with relative earnings visibility. Indeed there is little indication to suggest this slowdown has stabilized thus far.
Broad based slowdown
Growth that was designed to slowdown in order to rein in CAD, e.g. BI allowing Rp to weaken for an essentially dollarized economy, has proven to be very potent. Weaker commodity prices along with the transition easing from the recent investment surge may well have contributed as well. Indeed, the recent earnings trend suggests a more pronounced and broad-based slowdown. This ranges from large ticket items to even basic consumer staples. Bellwether FMCGs that have already reported are showing that top-line growth running at a decade low pace (ex-GFC period); a reflection of weaker buying power and rising competition. Equally, we have also noticed an uptick in NPL though more toward the SME and micro segments. In addition, our channel checks across various industries, including bellwether consumer packaging, mostly reported a deteriorating environment.
Slower and longer?
Contrary to general expectations, we think it is premature to assume an economic recovery in 2H15. Indeed sub-5% growth for the year cannot be ruled out. Recently the capex trend suggests easing post the initial surge 3-4 years ago. That along with the job creation trend, easily half the pace seen in the past couple of years, is not supportive of any fast economic recovery in the second half. While we remain upbeat that the govt. infrastructure spending will be punchier into 2H, we think the direct economic impact would be muted. Indeed the more powerful multiplier effect will only be visible in the medium term. Indeed there is little indication to suggest this slowdown has already stabilized. As such, we believe stock picking toward earnings visibility and predictability will be key in this 'new normal'.
Macro improving vs Micro worsening - Market context
In balance, we think the market downside risk is limited; yet we think it may be too early to be an aggressive buyer. We think the macro environment is turning more positive, e.g. CAD possibly below BI's guidance of 1.6% in 1Q, along with easing inflation, etc. Politics too, seems to have stabilized, which should pave the way for the govt. to kick-start major infrastructure projects. Yet, faced with the possibly of the slowest growth in a decade (ex-GFC), along with flow favoring North Asia, we think stock picking towards better earnings visibility matters, notwithstanding the fact that initial sell-down tends to be indiscriminate. Within our DB Portfolio stocks, we think the following have high earnings visibility: BBCA and BBNI (Banks), TLKM (Telco), ICBP and KLBF (Consumer). Conversely, stocks that have done well in spite of worsening earnings fundamental such as ASII and UNTR appear more exposed.
$IHSG